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Sea loses steam amid mega US$2.57 billion offering

Shares of Sea Limited - which owns Shopee and Garena- slipped from record highs ahead of the issuance of new shares to fund business expansion.

  • Sea will sell new securities at US$195 each in a public offering
  • Shares of the e-commerce, fintech player faltered after the announcement
  • The fresh capital may go into its new digital bank in Singapore, analysts say
  • But sceptics believe the digital bank may still worsen cash burn

Equity dilution dampens investor sentiment

Sea Limited’s stock ended last week on weaker ground, following a statement that it plans to raise US$2.57 billion through the issuance of new public securities on the New York Stock Exchange.

In response to the move (which tends to dilute existing shareholders' ownership stake), investors sold down the e-commerce, gaming and fintech stock. It slipped 2.8% to finish at US$193.38 on Friday (11 December), after having declined 1.6% on Wednesday and 1.8% on Thursday.

Just a week ago (04 December), optimism from Sea receiving one of Singapore’s coveted digital full-bank (DFB) licences helped Southeast Asia’s most valuable counter rocket to an all-time high of US$198.78.

New share deal upsized on strong demand

Sea initially proposed on Thursday (11 December) to issue 11 million new American Depositary Shares (ADS), each representing one Class A ordinary share, in an underwritten public offering.

The next day, it upsized the offering to 13.2 million ADS ‘to address strong investor demand’, pricing the new shares at US$195 apiece.

The underwriters, led by Goldman Sachs and JPMorgan, may also buy another 1.98 million ADS, which will yield US$386 million at the same price.

Proceeds from the offering, closing on 15 December, will finance business expansion and ‘potential strategic investments and acquisitions’, Sea said.

According to Bloomberg Intelligence analysts, this new capital could be used for the digital bank or to speed up its e-commerce and gaming investments.

Tailwinds from Sea’s new digital bank

The DFB will be able to take deposits and provide banking services to retail and corporate customers.

DBS Group Research, which maintained a ‘buy’ call on the stock and upped its target price to US$228, said the DFB will accelerate regional growth in Sea’s digital financial services.

Adjusted revenue for SeaMoney, the digital financial services arm, should thus post a 124% compound annual growth rate for 2019-2022, based on DBS analyst Sachin Mittal’s projections.

Millennials using Sea’s gaming platform, Garena, ‘might find it comfortable’ to also maintain a bank account with the company, he added.

And being able to both take customer deposits and serve as a lender for merchants on Shopee - its e-commerce division - will give Sea an edge over its e-wallet competitors, DBS said.

In the same vein, Jefferies expects Sea to initially focus on financing e-commerce players, through working-capital financing, cash management, cross-border payments, and payrolls. Jefferies has a ‘buy’ call and US$216 target on the stock.

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